Norman Chan mulls move at Beijing summit

The Hong Kong Monetary Authority is interested in converting part of the city's foreign reserves into yuan and is also keen on entering the mainland's bond market, said Chief Executive Norman Chan.

Chan, speaking at a summit in Beijing Friday, did not elaborate or provide any further details.

Mark Wan, chief analyst at Hang Seng Bank Investment, said any such move is technically not feasible at the moment, as China still has a closed capital account and the currency is not yet freely convertible.

However, Wan believes that Chan's remarks could arise from recent calls to peg the Hong Kong dollar to the yuan instead of the US dollar. With expectations of a second round of quantitative easing undertaken by the US Federal Reserve, the dollar is weakening against other major currencies. October 15 saw the US dollar trading near its weakest level in 15 years against the yen before a speech by US Federal Reserve Chairman Ben Bernanke in Boston. The speech laid the groundwork for a further round of intervention in which the US Federal Reserve is expected to engage a looser monetary policy.

Under the current peg in the city, a weak US dollar means a weak Hong Kong dollar, triggering worries over imported inflation. In contrast, the more stable yuan offers an attractive alternative, Wan added.

He said that in the long run the city will eventually scrap its own currency and use the yuan. However, in the near term, it is in Hong Kong's interest to maintain its peg to the US dollar, as it is still a global currency.

The People's Bank of China set the reference rate for the yuan at 6.6497 per US dollar Friday, the highest since the Chinese currency's peg to the dollar was ended in July 2005 - and the currency's sixth consecutive weekly advance. The yuan has seen more volatility in its trading against the dollar since the middle of June. Trading then at 6.83 yuan per US dollar, the latter has been on a downward trend since.

Li Huiyong, chief economist of macro research at SWS Research, the research arm of Chinese brokerage Shenyinwanguo, forecast that the pace of yuan appreciation will quicken in 2011. He predicted that the Chinese currency will appreciate to a level of 6 yuan per US dollar in the next three years.

Bloomberg contributed to this story.

China Daily

(HK Edition 10/16/2010 page3)